At Warren & Partners we have advised numerous executives on the tax treatment of their termination package which includes reviewing the Severance Agreement to ensure that it is drafted in the most tax efficient manner.  A lump sum payment on termination of your employment may be exempt from tax or may qualify for tax relief. We work with our clients to ensure that they maximise their net after tax termination payment.

Generally, employees may receive either a (1) statutory redundancy payment and/or (2) ex-gratia termination payment. The nature of the payment dictates how it is taxed.

Statutory redundancy payment

^‍Where you lose your job because your employer is closing the business or reducing staff numbers, this is known as a redundancy.

You are entitled to get a minimum redundancy payment after you have 2 years’ (104 weeks) service in your job. The statutory redundancy payment is based on a calculation using your pay and your length of service.

If you are eligible for redundancy pay, you are entitled to:

• Two weeks' pay for every year of service
• One additional week's pay

The maximum weekly amount used to calculate redundancy pay is €600 a week even if your pay is more per week.

The statutory redundancy payment is exempt from tax.

Ex-gratia termination payment

Your employer is not legally obliged to pay anything on top of the normal statutory redundancy entitlements unless a contractual obligation exists. However,  as part of a redundancy process, the employer may pay a voluntary non contractual ex gratia termination payment.

All or part of the ex gratia termination payment may qualify for tax relief. The three types of tax reliefs are (1) Basic Exemption, (2) Increased Basic Exemption and (3) Standard Capital Superannuation Benefit (SCSB) relief.

There is a lifetime cap of €200,000 on the tax free amount of a termination payment which an employee can obtain.

Claiming the increased basic exemption or the SCSB relief can have an impact on your ability to obtain a tax free lump sum from your occupational employer pension scheme at retirement.  It is important that the employee understands that complex tax rules around redundancy and retirement payments before making any decisions and before signing a Severance Agreement with their employer.

Other redundancy reliefs

As part of the termination process, the employee may also receive certain other benefits from their former employment including the payment of legal fees and retraining costs. Again, specific conditions apply to the payment of these benefits to ensure that a tax charge does not arise for the employee.

Conclusion

It is extremely important that an employee gets professional tax advice before signing the Severance Agreement to ensure that the agreement is drafted in the most tax efficient manner.  Once the Agreement is signed, it is generally too late to make any changes. The obligation to deduct PAYE lies with the employer so it is important the employee obtains their own independent tax advice and the tax treatment of the payment is agreed with the employer.